SECTOR UPDATE

POLICY PULSE
Healthcare reforms – Big will become bigger

India Equity Research | Healthcare

Lately, there has been lot of noise in the media about heightened government
sensitivity towards healthcare and pharma practices, both at the centre and in
states. This implies an imminent risk of: i) price control or cap on medicines,
diagnostic tests and procedures in the short term; and ii) a shift from branded
to generic medicines over the long term. In our view, the government is trying
to impose regulatory controls to raise the quality of healthcare and bring
transparency in pricing to bring in affordability. Though the process will be a
challenging in the short term and can impact the earnings and valuations, in the
long term this will accelerate the shift from the unorganized to organized.
Healthcare providers, especially hospitals, will thus shift towards a service led
model, while pharma companies reduce their sales and marketing spends. We
believe these reforms will drive consolidation in long term. Analysis of recent
government proposals is part of the note.

Central govt.’s price control: Would make healthcare affordable

The government is planning to link the prices of scheduled and non-scheduled drugs to a
special pharma index. This index will likely form the basis for future price revisions. The
government also intends to control the prices of diagnostics and healthcare packages.
The average price increase of Indian Pharmaceutical Market was 1.3% over three years.

Delhi’s healthcare bill: Consumer and hospitals both to benefit

Here the endeavor is to improve the patient experience and lower their cost burden. We
have read the white paper and most of the provisions therein should improve the overall
healthcare services. It suggests every nursing home/ private hospital must have a tie-up
with a multi speciality hospital. It also allows 20% markup in cost of high-risk packages.
One of the controversial suggestions is to cap the gross margins on consumables at 50%.
The option to purchase drugs outside the hospital pharmacy and a mechanism to
eradicate commissions are other notable recommendations.

Clinical Establishment Act: To lift quality of healthcare

The Act prescribes minimum standards for facilities and services provided by healthcare
establishments registered with the states. Four states and all union territories except
Delhi have implemented this law, and six states have adopted the Act pending
implementation. The Act requires states to have a necessary regulatory machinery to Deepak Malik
verify documents, infrastructure, and qualifications of medical staff and availability of +91 22 6620 3147
medical equipment before establishing a nursing home. It also requires regular inspection deepak.malik@edelweissfin.com

by the regulator. The general apprehension is that the government may cap rates for
Ankit Hatalkar
various diagnostic tests, procedures, surgeries or treatments. +91 22 6623 3097
ankit.hatalkar@edelweissfin.com
Ayushman Bharat: Major hospitals may refrain from it
Videesha Mehta
Last month, the government released a model tender for the Pradhan Mantri Rashtriya videesha.mehta@edelweissfin.com
Swasthya Suraksha Mission (PMRSSM), which expected to start in October 2018. Charges
for the procedures listed in the scheme are extremely low and we believe corporate
hospitals like Apollo and Max are likely to refrain from empanelment with this scheme. June 08, 2018

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1
Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Healthcare

Recommendations by Delhi Government

A few weeks ago, the Delhi government came up with its draft proposal to address patients’
issues at private hospitals (PH) and nursing homes (NH). The recommendations have been
elaborated below:

a) In order to ensure that the consumer is not forced to buy non-NLEM drugs, all hospitals
should preferably prescribe only National List of Essential Medicines (NLEM) drugs and
doctors while prescribing non-NLEM drugs should counsel the patient and provide
printed counsel material to the patient and their attendant.

b) Bill non-NLEM drugs/disposables/consumables at lower of maximum retail price (MRP)

or cost + up to a 50% markup and implants at lower of MRP or cost + up to a 35%
markup, to avoid profiteering by healthcare establishments. Furthermore, drugs can be
purchased from a hospital’s in-house pharmacy or outside.

c) Hospital shall waive off:

 50% of total bill in case of death in an emergency room/casualty department within
6 hours of their arrival
 20% of total bill if the death occurs between 6-24 hours of arrival
The hospital can levy extra charges for any complications expected to arise during the
surgery, subject to displaying undertaking of such practice at various places in the
premises especially at the admission counter.

d) In order to eradicate cuts & commissions, patients will be given the right to decide
whether any further consultation/ counseling is required during their course of indoor
admission in the hospital. For greater transparency, hospitals will to give an upfront
declaration on the bill that no cuts & commissions have been paid to any
person/organisation.

e) Under no circumstances should an NH refuse treatment to any injured/serious patients

and ensure immediate medical care is provided.
f) Every nursing home/ private hospital will be linked with a super/multispecialty hospital
and would provide ambulance for the shifting patient.

g) Others:
 Under no circumstances, including non-payment of dues, can a PH/NH disrespect a
dead body

 In order to avoid medical negligence and to ensure patient safety, development of

‘Standard Operating Procedures’ that need to be implemented mandatorily.

 Bring an end to levying items like compulsory donation/ billing charges etc.

Pradhan Mantri Rashtriya Swasthya Suraksha Mission

In May 2018, the government released a model tender document to select insurance
companies for implementing the PMRSSM. The PMRSSM is part of the National Health
Protection Scheme (NHPS), which we covered in our post-budget note. The model tender
suggests the following:

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 Sector Update

a) Package rates: The tender specifies rates for 1,394 procedures, out of which ~45% are
mandated for pre-authorization. If the treatment cost exceeds the available benefit
coverage, which is capped at INR500,000 per family per year, the remaining cost will be
borne by the beneficiary. In case of multiple treatments, the 2 nd highest treatment shall
be at 50% of the package rate and 3rd highest at 25%. During the first two years of the
policy cover period, the insurer shall not permit any change to the package rates.

b) Empanelment of providers: Private healthcare providers which comply with a set of

requirements can apply for empanelment either directly or online. After expiry of the
three year empanelment duration, the agreement can be renewed every three years till
expiry or validity of the National Accreditation Board for Hospitals & Healthcare
Providers (NABH) certificate.

c) Pre-authorization of procedures: Nearly 610 of the 1,354 packages required pre-

authorisation from the insurance provider. Of these, almost all treatments in cardiology,
ophthalmology, oncology and paediatric require pre-authorisation.

d) Claims management: Healthcare providers shall be obligated to submit claims within 24

hours of discharge. Insurer should be responsible for settling all claims within fifteen
days after receiving all the required documents.

Table 1: Examples of prescribed rates given in PMRSSM

Rates provided in the Average Industry Rates
Procedure/ Surgery
tender (INR) (INR)
Caesarian Delivery 9,000 30,000 - 60,000
Total Hip Replacement 75000 - 90000 200,000 - 300,000
Total Knee Replacement 80,000 200,000 - 400,000
Coronary artery bypass 90,000 - 150,000 600,000 - 800,000
Cataract 5,000 -10,500 30,000-35,000

Fig.1: Summary of government regulations/policies

Snapshot

Price controls Proposal by Delhi govt. Clinical Establishment Act Affordable health scheme

• Link prices of all drugs – essential
and others to a special index for
medicines
• Index of medicines will form the
basis for all price revisions
• World Health Organisation has
recently announced its list of
essential diagnostic tests
• Up to 50% margin for using non-
NLEM
drugs/consumables/disposables
and up to 35% margin for using
implants
• Drugs can be purchased from
either hospital’s in-house
pharmacy or outside
• 50% waiver on bill in case of
death within six hours of arrival
and 20% waiver in case of death
between 6-24 hours of arrival
• Eradication of cuts and
commissions
• Act prescribes the minimum
standards for facilities and
services provided by
establishments registered with
states
• Regular inspection by regulator
• Government may cap charges for
various diagnostic tests,
procedures, surgeries and
treatments
• Part of the National Health
Protection Scheme
• Specifies guideline rates for 1,394
procedures
• In case of multiple treatments,
the 2 nd highest treatment shall be
at 50% of the package rate and
the 3 rd highest at 25%
• Private healthcare providers that
comply with a set of requirements
can apply for empanelment either
directly or online
• Nearly 610 of the 1,354 packages
require pre-authorisation from
the insurance provider

Source: Edelweiss research

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 Healthcare
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com
Digitally signed by ADITYA NARAIN

ADITYA
DN: c=IN, o=EDELWEISS SECURITIES
LIMITED, ou=HEAD RESEARCH,
Aditya Narain cn=ADITYA NARAIN,
serialNumber=e0576796072ad1a3266
c27990f20bf0213f69235fc3f1bcd0fa1c

NARAIN
Head of Research 30092792c20, postalCode=400005,
2.5.4.20=6b7d777d3c8c77e0e2c454e
91543f9f4d9b8311cf0678cd975097fc
aditya.narain@edelweissfin.com 645327865, st=Maharashtra
Date: 2018.06.08 18:47:55 +05'30'

Coverage group(s) of stocks by primary analyst(s): Healthcare

Apollo Hospitals Enterprise, Dr. Lal Pathlabs Ltd, FORTIS HEALTHCARE LTD, HealthCare Global Enterprises Limited, Max India Limited, Thyrocare
Technologies Ltd

Recent Research
Recent Research
Date Company Title Price (INR) Recos
Date Company Title Price (INR) Recos
02-Jan-14 IPCA The growth prescription; 729 Buy
31-May-18 Laboratories
Apollo VisitContinues
Note to deliver amid 950 Buy
Hospitals challenging environment;
23-Dec-13 Torrent Aggressive M&A valuations to
Result Update 480 Hold
Pharma strain ROCE; Event Update
30-May-18 Max India Disappointing performance 84 Hold
17-Dec-13 Ranbaxy Receives approval for generic
amidst regulatory 418 Hold
Laboratories Felodipine ;
uncertainties; Result Update
EdelFlash
24-May-18 Apollo All set to cruise in overdrive!; 964 Buy
Hospitals Visit Note

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period
* 1stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 156 62 11

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 Sector Update
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